Markets Get More Realistic as 2024 Gets Going

In late 2023 we saw some huge moves which in fact seemed a bit irrational, but markets tend to act irrationally in the final weeks of the year, due to position adjustments by large players, as well as due to large cash flows before the year ends. However, things settle down as the new year begins and fundamentals take over, which is what is happening now.

Markets are currently pricing in 145 basis points in FED cuts this year, which is lower than the 157 bps in cuts that they were predicting late last month. So, the risk sentiment has abated somewhat after turning immensely positive in December, and stock markets are down for the second day in a row, which are evenly distributed across the major indices.

US 10-year Treasury rates surpassed 4% for the first time since the middle of last month, following the FED meeting. The trend in bond yields has been constant since late December which took the price to the highest level since December 13. The USD kept pushing higher against most major currencies, with USD/JPY gaining around 150 pips to touch 143.43 earlier today.

The major US market indices are down for the second day in a row. The declines are more evenly distributed across the three major indices. FED member Barkin made some comments earlier, sounding satisfied with the way inflation is falling, which is bearish for the USD.

Comments from Barkin

• Progress on Inflation and Healthy Economy: According to Barkin, there is a sense of making real progress on managing inflation, and the overall health of the economy is robust.
• PCE Inflation: The six-month Personal Consumption Expenditures (PCE) inflation is now reported to be ‘just below’ the 2% target. PCE is a measure of inflation commonly used by central banks.
• Potential for a Soft Landing: There is an acknowledgment of the possibility of a soft landing in the economy. A soft landing refers to a situation where the economy slows down to a more sustainable growth rate without entering a recession.
• Risks to Consider: Barkin points out various risks, including the delayed impact of high interest rates on credit markets, external shocks to the economy, the possibility of services inflation getting stuck at elevated levels, and the impact of strong demand.
• Potential for Additional Rate Hikes: The statement suggests that there is still the potential for additional interest rate hikes. This indicates a willingness to use monetary policy tools to manage economic conditions, potentially to curb inflation.
• Shift in Focus: There is a suggestion to shift focus away from the path of interest rates and instead focus on whether inflation continues to decline and the economy remains strong. This could imply a more data-dependent approach to monetary policy.

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